Despite all that computer firepower, bond markets are archaic compared to those for currency and stocks. There is still no real central and transparent electronic bond market in Canada for retail customers. Until the 1990s, bonds were traded almost exclusively by phone-investors who wanted to buy or sell might call three or four dealers to get price quotes. In 2001, Canada's major investment dealers created CanDeal, an electronic market for GofC bonds and other securities, and the TMX Group now has a stake. But Byrd estimates that about half of all bond trading is still done by phone.

Because all bids, offers and executed trades aren't fed into a central market immediately, trading bonds can be more difficult than trading stocks or currencies. A typical GofC bond order for an institution would be, say, $30 million. On Bank of Canada rate announcement days, big dealers often lay in inventories of billions of dollars worth of GofCs, as RBC did on the morning of Oct. 19.

But if prices and yields are moving fast, it can be hard to get a handle on what's going on. Oct. 19 begins pretty much as predicted. Investors start buying GofC bonds right after the rate announcement at 9 a.m., and yields dip across the yield curve (see "What's a yield curve?" page 53). But shortly after 10, yields start going back up. The curve is also behaving oddly: The initial dip in five-year GofCs was bigger than that for two-years and three-years. Normally, you'd expect the shorter the duration, the bigger the drop.

Traders are fuming. Some (as shocking as this may sound) are using four-letter words. "Won't someone buy my bonds?" moans Byrd, his face flushing. Much of the wailing is just kidding around-a way for the traders to blow off steam. But some of it's genuine.

What next? Will the market resume pushing yields lower? Should RBC do some buying to try to get some momentum going? Traders yell across the aisle to RBC's institutional sales reps for bonds, who are on their phones to clients. Byrd blurts out things like, "If the fives are down to 38, we'll take 10 there."

By 11 a.m., yields across the GofC curve have resumed drifting down, and they finish modestly lower at the close of the trading day at 5:25 p.m. In a market that's often opaque from minute to minute, the RBC traders' instincts have turned out to be correct. Most of the market action is over by lunchtime. "Volumes were light at about $5.5 billion," says Byrd. "We were actually busier the day before and traded around $7 billion."

A Bank of Canada interest rate announcement isn't as big a deal in the corporate bond market as it is in the Government of Canada bond market. Before the 9 a.m. announcement on Oct. 19, Steve Thom, RBC's managing director in charge of Canadian corporate bond trading, says that 10% of what will happen to Canadian corporate issues that day will be a response to the rate decision, "and 90% will depend on other stuff"-U.S. stock and bond markets, central bank moves in other major countries, and so on.

The overriding issue in corporate markets is credit quality. Bond investors must constantly assess the creditworthiness of companies. True, they also monitor the spread between corporate bond yields and the typically lower yields on government bonds of the same durations. Over the past year or so, investor demand for even junk bonds (ones graded very low by bond rating agencies) has pushed yields on them down to within a few percentage points of yields on government bonds.

On the morning of Oct. 19, Bank of America and other large U.S. banks post stronger-than-expected third-quarter earnings. Early that morning, however, there is a surprise quarter-point interest-rate increase by the Bank of China. Stocks open sharply lower in New York because of fears that China may trigger a global economic downturn. Yet, Thom says, U.S. corporate bonds "are doing okay." When stocks slide, investors often look to quality short-term corporate bonds instead.

The Bank of Canada's decision to not increase rates also helps Canadian companies. Any firm thinking of issuing bonds won't have to offer investors very high yields. On the morning of Oct. 19, there are rumours in the market that a major Canadian bank is about to issue bonds. The rumours by themselves cool demand for GofC bonds, because investors in search of a slightly higher yield may buy bank bonds instead. As things turn out, CIBC issues $1.5 billion worth of bonds the following day, which also sees issues from Brookfield Asset Management ($350 million) and First Capital Realty ($50 million). Thanks for that, Mr. Carney.

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